Why Cities Should Invest in Startups: The Key to Economic Growth

Why Startups? Let’s Distinguish Why City Officials Should be Focused on Strategic Investment in Innovation-Driven Ventures (and why most are failing despite trying)

It’s one of the most misunderstood yet consequential distinctions in economic development today: the difference between startups and small businesses. Cities talk about “entrepreneurship” like it’s a monolithic idea, but if we’re being intellectually honest, and we must be if we’re going to get serious about 21st-century economic growth, we need to stop treating a new Main Street cupcake shop like it’s comparable to an AI platform that just closed a $3 million seed round. One is a business. The other is a startup. And the reasons cities should invest in startups—not just “small businesses”—are vast, compelling, and empirically undeniable.

Let’s unpack Why Startups, and why this matters more now than ever.

Startups Are Not Small Businesses

Let’s start where everyone gets it wrong. A startup, as defined by Steve Blank, is “a temporary organization designed to search for a repeatable and scalable business model.” It’s a hypothesis, an experiment, a high-risk, high-reward endeavor. A small business, by contrast, is built to last, often profitable from day one, rooted in known markets, and designed not to scale exponentially, but to serve reliably. Think local laundromat versus cloud-based logistics API.

The distinction isn’t semantic, it’s structural and guiding. And when cities lump them together under the banner of “supporting local business,” they shortchange the potential of startups and misallocate the support ecosystems those ventures actually need.

All that said, we’re not here to make that case, so if you’d like to read further why startups are not small businesses, click here. If seeking more support with local legislators, here is a white paper guiding government agencies as to how and why to distinguish small businesses from startups.

1. Job Creation: Startups Punch Above Their Weight

If you want job growth, rather than jobs, support startups, not just because they hire, but because they create net new jobs.

According to research from the Kauffman Foundation, “new and young companies are the primary source of job creation in the American economy.” In fact, without new firms, net job creation in the U.S. would be negative in most years. A 2010 study with John Haltiwanger, Javier Miranda, Dane Stangler, Bob Litan, Paul Kedrosky, and Carl Schramm found that firms less than five years old accounted for nearly all net job creation in the U.S. between 1980 and 2005.

“Because startups that develop organically are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail,” said the study’s author, Tim Kane, Kauffman Foundation senior fellow in Research and Policy. “Such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models.”

Compare that to small businesses, which, while important for employment, often shift jobs around within a regional economy rather than creating new net employment. Startups grow fast and hire fast, even if MOST (overwhelmingly most) don’t last. When they succeed, they scale in a way that multiplies employment, rapidly. Stripe employed 2,500+ people within a few years. Your average corner bakery, if it makes it that long, might employ ten.

In plain English: it’s about being net new, not small nor even simply new. Support startups, and you build permanent job growth, support incumbents or existing business models, and you merely shuffle the deck.

2. Public Appeal: Startups Win Hearts and Wallets

People love a good startup story. There’s a romance to the underdog, the innovator, the 23-year-old dropout coding in a garage. Cities benefit from that narrative halo.

Startups attract aspirational talent and bring in the ambitious, the curious, the tireless. That creates not just jobs but community culture: hackathons, pitch nights, innovation festivals. Look at Boulder, CO or Austin, TX because they didn’t become a magnet for talent because of tax credits or retail square footage. It became a startup hub with stories told and community built and supported, and people followed.

More, consumer enthusiasm follows. Even more? Voters like a good story of an innovation brought to life and entrepreneurship fostered (not business ownership! Startup founding). Consider the meteoric rise of brand affinity in DTC startups like Glossier or Warby Parker. People like to support new ideas. Local governments benefit from this buzz, especially when a homegrown startup goes national or global. It puts a city on the map. Chattanooga, Tennessee, where The Gig was put in place (the city’s fiber-optic broadband network), helped spawn dozens of startups, and international attention; now there pushing to be Quantum, something I’ve been driving cities to do while they’d rather play catchup doing blockchain, crypto, and AI.

3. Media Attention: Startups Drive Headlines That Shape Identity

You show me a regional news headline about a new HVAC company, I’ll show you ten about tech startups raising capital, launching automation tools, or getting acquired. Media chases velocity and novelty, and only startups offer both.

Cities that foster startups dominate economic and tech media coverage: VC rounds, acquisitions, IPOs, and entrepreneurial events make headlines. Did you notice of Miami post-2020? A combination of founder migration, VC attention, and some spicy Twitter behavior from the mayor turned it into a headline-grabbing startup city seemingly overnight.

Media matters not just for PR, but for investor attraction, tourism, even real estate development. When your city is in TechCrunch, talent shows up. When Public Affairs is involved, they teach, guide, and publicize your work. Capital follows talent (not the other way around by the way!). And then your economic base changes, permanently.

4. Startup Economic Impact: Multipliers You Can’t Ignore

Startups don’t just grow, they explode. And when they do, they create ecosystems.

One successful startup begets another. The cofounders who exit start new companies (if the culture and economy of your city is right for it). Early employees become angel investors. Engineers hire engineers. Suppliers scale up to meet demand. Universities churn out interns who join the fray.

This is what economists call the multiplier effect. The National Bureau of Economic Research found that each high-tech job in a region creates 4.3 additional jobs in the local economy over time. For manufacturing, that number is closer to 1.6. For retail? Nearly zero.

Let me say that again since most cities are pushing for local retail – each retail job in a local economy creates near zero additional jobs. Your job growth policy is wrong (and I’d even hazard criticizing you, you’re taking the easy way out because you don’t understand this world)

In fact, a Brookings report on “Innovation Districts” notes that startup clusters generate more rapid wage growth and productivity gains than virtually any other form of economic development. Innovation economies attract federal grants, research contracts, and industry partnerships. They also retain talent, because talent stays where opportunities grow.

As The Economist put it: “Startups are the R&D labs of capitalism.” And if cities are wise, they’ll start funding their own labs before the competition outpaces them.

Startups Aren’t Optional, Cities, if you actually give a damn

So, you have your small business policy, your small business resources, and your small business programs, and you feel satisfied that small business means startup. That’s like saying the future of economic development is making sure we have more Blockbusters and fewer Netflixes.

Supporting startups isn’t a feel-good initiative. It’s an economic imperative; they generate net new jobs, they attract ambitious talent, they make headlines that shape your city’s identity, and they spark economic multipliers that build entire industries.

If you’re running an EDC, chamber of commerce, or mayor’s office and still framing your entrepreneurship efforts around ribbon-cuttings and shop local campaigns, you’re missing the forest for the trees. Both small businesses and startups are vital, but only startups change the game (that’s their distinguishing characteristic).

Want to see real growth in your city? Invest in the people and organizations fostering startups. Don’t invest directly in startups! That’s a fool’s errand for government; invest in reducing regulation, supporting the ecosystem builders, engaging journalists, sponsoring the events and programs, and bringing in consultants, public affairs professionals, and investors from other cities, who specialize and have experience in “startups.” Not just because they need you, frankly, you need them more.

Maybe take a look at how Tulsa, Chattanooga, or even Lubbock beat your city to the punch. Not certain, not sure, or want to argue with me, I’m available to sit in a room with local leaders and lawmakers and fix this there.